The Misuse of Profit Margins to Infer Market Power

Robert H. Bork & J. Gregory Sidak

Abstract

Profit margins are not reliable evidence from which to infer market power in antitrust cases. The use of accounting profit margins has no economic justification in dominance proceedings. Its use can increase the frequency and magnitude of enforcement errors. To illustrate, we examine the case of Telcel, which Mexican regulators declared dominant in mobile telephony on the basis of Telcel’s profit margins. We show that, to the contrary, Telcel’s margins were actually within the bounds of regularly observed profit margins in the telecommunications industry.